Nordea’s assessment remains that the bank has finished raising interest rates.

The European Central Bank’s July monetary policy meeting offered little guidance on what the ECB will do at its September meeting.

Activity data has been weak since the July session, while inflation has held steady. In fact, the risks of inflationary stagnation are mentioned twice in the minutes. Recently, a number of hawkish members of the Board of Governors have spoken in favor of another rate hike, while most, including Executive Board member Schnabel, were game-minded.

“We stick to our long-held baseline scenario of interest rates peaking at 3.75% and think the European Central Bank will hold off on raising interest rates in September while maintaining its contractionary bias. Now, this will be a close call and there could be a fierce battle between hikers and those who want to keep rates unchanged at the European Central Bank’s September meeting.

source: ING

New Zealand’s central bank’s ongoing efforts to maintain restrictive measures highlight the intricate balance required between actively managing inflation and safeguarding a moderately evolving economy. The Bank of New Zealand’s decision to pause its series of robust rate hikes in July, following an aggressive spree last year, acknowledges the evolving economic landscape where price pressures are gradually subsiding. However, the intricate interplay between waning economic momentum and the persistent concern of delayed rekindling of inflation presents a multifaceted challenge to price dynamics. Experts and financial analysts, finely attuned to the nuanced dynamics of these elements, find themselves at the juncture of two divergent potential paths. The prevailing market consensus suggests that the New Zealand central bank’s tightening phase has concluded, potentially paving the way for an impending interest rate reduction in the first half of the coming year. Nonetheless, substantial dissent exists, with financial institutions ANZ and Westpac endorsing an additional 0.25% rate hike by the end of 2023 from the New Zealand central bank.

The impending conclusion approaches for the eagerly awaited release of the Reserve Bank of New Zealand’s report, a key component of the upcoming quarterly monetary policy statement. The comprehensive report, featuring revised interest rate projections spanning three years, offers insights into the strategic path chosen by the Bank of New Zealand. Despite economic growth’s significant role in shaping the inflation perspective, experts concur that economic activity is on track for further moderation in the latter part of 2023 and the subsequent year. The intricate ramifications of the interest rate adjustments present a multi-faceted scenario, impacting aspects ranging from household finances to broader sectors like manufacturing and real estate. The gradual shift toward higher interest rates, though not yet profoundly impacting homeowners with fixed-rate mortgages, is projected to curtail consumer spending. This trend mirrors the narrative in the manufacturing sector, which has weathered the strain of five consecutive months of contraction, mirroring the depths of the global financial crisis.

The vital real estate sector, fundamental to economic well-being, contends with a substantial 10% decline in housing prices over the last year, accompanied by a halt in sales volume—an occurrence mirrored within the construction industry. Amid New Zealand’s pursuit of its own domestic economic vitality, the reverberation of the global economic pattern is unavoidable. China’s evident deceleration in commodity demand has seeped into New Zealand’s economic projection, exemplified by dairy giant Fonterra’s projection of a 15% reduction in payments to local farmers for milk—a tangible manifestation of global consolidation. Amidst this backdrop, the influx of immigrants and the burgeoning growth in inbound tourism serve as shields against the prevailing obscurity. Concurrently, the influx of foreign labor gradually alleviates inflationary pressures on wages.

While the total inflation decreasing to 6% in the second quarter shows a more moderate path, the indicators of high domestic price pressure continue; With 2-year inflation expectations coming in at 2.83%, they are getting closer to the upper end of the New Zealand central bank’s target range. In parallel, the relentless rise in food prices, which saw a 9.6 percent year-on-year increase through July, continues to signal underlying resilience in price dynamics. As New Zealand’s central bank navigates these complex currents, Sharon Zollner, ANZ’s chief economist in Auckland, reminds us that caution remains a key focus for economists. The gradual erosion of inflation expectations may provide some respite for the New Zealand central bank, but persistent differences in target levels require vigilance. Zollner’s expectation of a final interest rate hike by the New Zealand central bank in November underscores the ongoing challenges in containing inflation and stabilizing economic growth.

Update:

Bank of New Zealand Monetary Statement: Interest rates should remain at restrictive levels for the foreseeable future

As expected and necessary, the current level of interest rates is restraining spending, and thus inflationary pressures.

The supply and demand imbalance is getting better.

As expected, New Zealand’s economy is expanding broadly.

The overall inflation rate and inflation expectations have decreased, but the core rate of this index remains high.

Our forecasts indicate the possibility of an interest rate increase in the fourth quarter of 2023.

Bank of New Zealand members are convinced that as long as interest rates remain at restrictive levels, the CPI will return to its target range of 1-3% per year.

We still expect inflation to fall below 3% in the third quarter of 2024.

Bank of New Zealand members noted that the index-based estimate of the nominal neutral interest rate had risen by 0.25 percentage points to 2.25 percent.

Bank of New Zealand members forecast that inflation will remain within the target range until the second half of 2024.

A second consecutive benign set of inflation prints adds to optimism that the Fed rate hike cycle is at an end and a soft landing is achievable for the US economy. We continue to have our concerns about the economic outlook, centered on the abrupt hard stop in credit growth, but the Fed will soon be in a position to be able to cut rates if a recession materializes

US inflation pressures continue to ease

The US consumer price inflation report showed that prices rose 0.2% month-on-month at both the headline and core (ex-food and energy) levels as was expected. To two decimal places, it was even better at 0.17% and 0.16% respectively, which meant that the annual rate of headline inflation came in at 3.2% rather than 3.3% (versus 3% in June). Core inflation slowed to 4.7% from 4.8% as expected.

A decent drop in used car prices helped (-1.3% MoM), but a second consecutive large decline in airfares (-8.1%) is a bit of a surprise. With medical care (-0.2%), recreation (0.1%), education (0%), and other goods and services (0.1%) all very subdued the Federal Reserve has got to be pretty happy with this. That so-called ‘supercore’ services (services ex-energy ex housing) look like it comes in at around 0.2% MoM, although the year-on-year rate ticks higher a little due to base effects.

Supercore services on the right path (YoY%)

Housing costs rose more than we thought though, with owners’ equivalent rent (the largest CPI component with a 25% weighting) rising 0.5% MoM/7.7% YoY but all in this report supports the nice goldilocks scenario of a slowdown in inflation allowing the Fed to stop hiking and eventually cut rates next year, which catches the slowing economy in time to prevent a recession. Obviously, a lot can go wrong and we think it probably will given the worries about the abrupt slowdown in credit growth, but for now, this data is encouraging.

Housing components of CPI set to slow in line with rents

Headline may tick higher on energy but the core will slow much further

Unfortunately, we are likely to see headline annual inflation rise further in YoY terms in August, albeit modestly. This will largely reflect higher energy costs, but we suspect it will resume its downward path again by October. Core inflation won’t have this problem as the 0.6% MoM prints for August and September last year will drop out of the annual comparison to be replaced by 0.2% readings we predict, allowing annual core inflation to slow to below 4% by September.

This is going to be increasingly driven by the all-important housing components, which are set to slow sharply based on observed rents while used car prices are set to fall further based on auction prices. Consequently, we are increasingly confident of a sub 3.5% YoY core CPI print by year-end. We had been hoping that headline inflation could be around 2.5%, but the rise in oil and gasoline prices over the last couple of months makes this look less achievable.

Higher energy costs can be viewed like a tax – no need for the Fed to hike further

In fact, there has been some talk that the rise in energy costs will make the Fed more inclined to hike rates since it will push up inflation with rising costs potentially passed onto other components such as logistics and airline fares. We are not that concerned though since it can have a disinflationary effect elsewhere because higher energy prices can be viewed similarly to a tax. You can’t avoid filling up your car with gasoline and you can’t heat your home etc so it effectively means you have less money at the end of the day to spend on other goods and services. It hurts economic activity and effectively intensifies disinflation in other components over time. As such the Fed will be watching and waiting to see what happens rather than any knee-jerk hike action.

NFIB survey points to weakening corporate pricing power and lower core CPI

Moreover, business surveys continue to point to weakening pricing power, such as the ISM services index being consistent with 1% headline CPI and the National Federation of Independent Business survey pointing to core inflation heading to 3% by year-end. Such an inflation backdrop should allow the Fed to respond to any recession threat with interest rate cuts next year.

source: ING

Industrial production retreated in May, but Japan’s economic outlook remains reasonably optimistic. While Tokyo inflation showed cost-push inflation persisting, tight labour conditions could signal supply-side price pressures materialising over the coming months

Industrial production dropped for the first time in four months

Manufacturing output declined -1.6% month-on-month seasonally adjusted, surpassing the market consensus of -1.0% in May – but the sequential quarterly trend rose solidly to 1.3% over three months from the previous quarter’s -1.8%. The outlook forecast for manufacturing activity in June rose solidly by 5.6%, and we therefore expect manufacturing output eventually to turn positive in the current quarter. The decline was broadly based, with the most notable drop in vehicles (-8.9%). We believe that the Golden Week holiday effects may have had some negative impact on the overall monthly output.

Sequential trend expands despite the monthly drop in May

Tokyo inflation slowed in June

Tokyo consumer inflation rose 3.1% year-on-year in June, missing the market consensus of 3.4%. The electricity fee hikes during the month appear to given a smaller boost than expected and spill-over to other service prices has been contained. In a monthly comparison, goods prices rose 0.4% MoM sa but service prices remain unchanged, which shows that Japan is still experiencing more cost-push inflation. However, labour market conditions tightened, with the unemployment rate staying at 2.6% for the second month. As a result, we believe we should be able to see supply-driven inflation in the coming months.

Tokyo inflation suggest cost push inflationary pressures build up

BoJ watch

While industrial production outcome was a bit lower than expected, we believe this is more like a temporary pause and is likely set to rise again. Taking solid retail sales data from yesterday into account, we expect GDP to remain positive in the second quarter. We also foresee cost-push inflation to continue for a while, with the Bank of Japan remaining patient on policy-making and rate hikes.

source: ING